Thursday, May 27, 2010

New research by the Harvard Business School proves that "stimulus" actually depresses private economic activity

"New research from Harvard Business School shows that federal spending in states causes local businesses to cut back rather than grow. In other words, when government spending grows the private sector shrinks. Key findings in the study:

The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent.

For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.

In the year that follows a congressman's ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent.

There is some evidence that firms scale back their employment and experience a decline in sales growth.

While these results are very interesting, the most intriguing part of this study is the admission by the authors — Lauren Cohen, Joshua Coval, and Christopher Malloy — that they were stunned by these results. Check out this Harvard Business School interview:

Recent research at Harvard Business School began with the premise that as a state's congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way.

It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman's ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent, according to their working paper, "Do Powerful Politicians Cause Corporate Downsizing?"

'It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the unanticipated increase in spending,' Coval reports."

So now we have more detailed evidence that Keynesian "stimulus" depresses, rather than stimulates economic growth. There has been consistent, overwhelming evidence that "stimulus" spending has failed on a national level around the world. Japan tried that approach over and over again in the 1980's and '90's without success, and the US has just seen unemployement rise substantially after the 2009 "stimulus."

Now the same phenomenon has been observed on a state level. But evidence doesn't count for much. As long as the MSM remains determinedly ignorant of basic economics, and thinks its role is to support Democrats, the public will keep hearing that we need more "stimulus," AKA government spending, to cure what ails us.